Tag Archives: Unemployment

Contributing to HSA while unemployed on COBRA insurance

This was a reader question submitted by HSAedge reader Helen, send your questions to evan@hsaedge.com

I am unemployed and not receiving unemployment benefits. I am participating in COBRA from my previous employer. Am I allowed to make HSA contributions if my husband is self-employed and does not have health insurance through his company?

You are allowed to make Health Savings Account contributions while using COBRA, assuming the plan you continue is HSA eligible. My take is that COBRA is a program that forces employers to offer the same insurance to past employees, although the pricing isn’t always the same. Thus, if you use COBRA to continue an HSA eligible plan, everything functions as normal, since you are continuing coverage under the same plan. COBRA just guarantees your access to that same plan. Note that employers are not required to continue making any sort of contributions into the HSA.

From the CobraInsurance website FAQ:

When the employee and dependents become eligible for COBRA, they can take this account with them. The employee can still contribute monies to the HSA and keep it for as long as they want. The employer is no longer obligated to contribute money or responsible for administrating the HSA when the employer or dependents are eligible for COBRA.

How to Use Your HSA While Unemployed

If you are reading this, there is a chance that you are unemployed and looking for work. Sorry to hear that, I have been there and it sucks. Keep your head up, make good financial choices and find the next (better) thing.

Health Insurance is confusing enough, but being unemployed adds a layer of complexity to it. Moreover, there are some complications and rules for using your Health Savings Account while unemployed. The following is a guideline for HSA holders if they ever find themselves unemployed and needing to lower their costs and make smart financial decisions:

Stay Insured

Losing a job definitely means a loss of cash flow and it is wise to seriously curb your spending during this period. That said, health insurance is not something you should cut from your budget. It is never worth opening yourself up to the risk of huge medical bills of a hospital visit just because you lost your job. I often state it as such:

A job loss is a temporary setback, but being injured while uninsured can create a long term crisis.

You should, however, consider cutting back on the type of insurance you have. At this point, you just need barebones, good, solid coverage, not a “cadillac” plan that includes low deductibles, low copays, vision, massage and back rubs, etc. You should be looking at the following and finding one that is affordable:

  • Short Term Insurance
    Short term health insurance is temporary insurance designed to fill gaps in coverage. Typically, this insurance lasts for 6 months but may last up to a year. Premiums are much less expensive than comparable plans and are a great option while you look for a job. You can find your term plans at eHealthInsurance.
  • High Deductible / Catastrophic Health Plan
    If you can’t find a short term insurance plan, search for plans that are longer in duration. What you are looking for is low premiums / high deductible – typical of a HDHP. Your goal is to use this insurance as little as possible (using it can be expensive) and to have it in case something catastrophic happens. You can also get quotes for this at eHealthInsurance.
  • Continue your current health plan using COBRA
    Your previous employer might be required to offer you your current health insurance after you leave as a result of the COBRA health care law. Depending on your plan, you might find COBRA very expensive as you are paying the entire premium now. However, definitely compare it against your other options.

Use HSA funds to pay for health insurance premiums while unemployed

If you had the foresight to contribute to your health savings account prior to losing your job, you will be glad you did. One of the HSA’s best benefits is that it allows you to use your HSA to pay for health insurance premiums while you are unemployed. To qualify, you must be receiving federal/state unemployment insurance or paying for COBRA or other continuation coverage. If so, your health insurance premiums while unemployed are qualified medical expenses.

In essence, you could contribute to you HSA for six months, lose your job, and use those contributions to pay for your health insurance for the next six months, all tax free. It is great piece of mind to know that, should you lose your job, your health insurance is financially covered. It is a part of using an HSA as an unemployment safety net.

Cash out any unreimbursed QME you are due

If you have been an astute HSA holder, you have been protecting your HSA and paying for as many medical expenses out of pocket as you can. Doing so allows two things to happen:

  1. You don’t deplete your HSA, so it continues to grow, tax free
  2. You are allowed to reimburse yourself for those expenses at any time in the future from your HSA

This is all part of the using your HSA as an ATM strategy. Now that you are unemployed, it may be time to cash those expenses in and generate some cash flow. While it isn’t ideal to tap your HSA, sometimes the situation calls for it and this is a great source of cash should you need it.

Negotiate any Health Insurance Expenses

While you are unemployed, cash is definitely king and you want to save as much as you can. You have been smart and gotten a high deductible health plan for the short term, but sometimes things happen and you need medical care. If your unexpected expense is below your deductible, you will likely be paying this out of pocket (or HSA) which can sting (these plans only kick in once you hit that deductible).

Don’t be afraid to negotiate your health care costs should they arise. Be straight up with your hospital billing agent and tell them you have a high deductible health plan that this entire expense will be paid out of pocket. Given that they only receive a fraction of what they bill insurance companies, that is amount you are shooting for.

Here is a great link on how to negotiate lower health care prices while you are unemployed. I have personally negotiated and lowered physician/emergency room medical expenses as well as with insurance companies while I was unemployed. Don’t be afraid, you can do it.

The HSA – an Unemployment Safety Net

What if you lost your job tomorrow?  Just the thought of unemployment makes most people cringe.  Besides wrecking havoc on your finances, unemployment causes emotional stress and discomfort.  For the vast majority, their employer is their single biggest source of income.

Dealing with a job loss is easier if you have prepared.  As you will see, there are ways an HSA can help you during an unemployment spell.  Hopefully you are in the planning stages now and can take action.  If you are eligible but haven’t opened an HSA yet, it might be a good time to take 5 minutes to do so.

HSA contributions can benefit you in the following ways during unemployment:

Pay for Health Insurance Premiums
If you are receiving state or federal unemployment aid, you can use your HSA to pay for your health care premiums.  Yes, you read that correctly: while unemployed your health insurance premium is considered a qualified medical expense.  As you probably know, this is not the case when you are employed.

A good strategy is to build your HSA so that the account could cover 6 months of health insurance after a job loss.  There are a number of benefits to this.  For one, you continue coverage that limits your total financial liability– an important part of protecting your assets.  Moreover, you will not need to write a check for health insurance each month; you simply use your HSA funds.  This definitely helps with cash flow as money will be tight.

Thirdly, it is great piece of mind to know that no matter what happens, you can cover X months worth of health care premiums with your HSA.  You have a plan and have cash reserves to get through the worst of it.  Once your situation brightens, you can rebuild your HSA fund.

Tax Free Cash Withdrawal
Your HSA can also function as a backup emergency fund, allowing you to withdraw tax-free cash in times of need.  You can only do this by reimbursing yourself for previous Qualified Medical Expense (QME) paid out of pocket.  I call this strategy using your HSA as an ATM. The way it works is this: if you incur a QME and elect to pay it out of pocket (i.e. not with your HSA), you can reimburse yourself for it from your HSA at any time in the future.  This simply involves transferring money from your HSA to your checking account in the amount of the initial QME.  For example, if you incur a $50 expense for a doctor visit, and you pay for it in cash, you are allowed to transfer $50 from your HSA to your checking account in the future.  This functionally makes the purchase tax-free, and these credits can be carried forward indefinitely.

Why would one want to carry forward Unreimbursed QME?  For one, you are allowing your HSA to compound and grow.  Due to the contribution limitations, each dollar in your HSA is somewhat valuable.  Paying medical expenses out of pocket protects your HSA, allowing it to grow from the highest possible base.

Additionally, carrying forward Unreimbursed QME allows you access to cash when needed.  If an emergency occurs, you can cash in your Unreimbursed QME credits for cash.  This is not the most ideal investment strategy, as you are reducing your principal, but sometimes emergencies require this action.  This is an advantage over accounts such as 401(k) that have a penalty for most cash withdrawals,

Cash Withdrawal w/ tax and penalty
This option is the most painful of the three, but it is still an option.  Perhaps you do not have any UQME with which to reimburse yourself.  At any time, you may make a non-qualified withdrawal from your HSA to pay for anything you want.  Basically, being non-qualified means the expense is not a qualified medical expense.  You simply ‘undo’ or take back your HSA contribution.

However, this comes at a (steep) price.  A non-qualified withdrawal invokes the following:

    1. Tax Man – This amount withdrawn is added to your current year’s gross income, which means it will be taxed.  Initially, you contributed tax free, but since you will be using this money for non qualified purchases, you must now pay tax on this.  For example, if your tax rate is 20% and you withdraw $500, you owe $100 in taxes.
    2. Penalty – Secondly, there is a 20% penalty for non-qualified withdrawals.  This amount is due to the IRS come tax time, and it is not fun.  Back to the prior example, besides the $100 in taxes, there is also a $100 penalty due.  Note:  if you are over 65, this penalty does not apply to you.  That is why an HSA is a great long term savings vehicle for the young, as you only owe income taxes on non-qualified withdrawals in your golden years.

The math shows why this option is so poor.  In our example, a $500 non-qualified withdrawal results in only $300 in your pocket.  You give away a huge percentage of your hard earned money to the government in this maneuver.  But sometimes you have no other option.

If you are at risk of having to make a non-qualified withdrawal during normal (employed) times, perhaps you are being too aggressive with your contributions.  One suggestion would be to park your HSA contributions in your emergency fund before contributing to your HSA.  Here, your money is much more liquid and you avoid penalty for withdrawing it.  At the end of the tax year, once any possible emergencies or costs have arisen, you can make a lump sum transfer to your HSA for that year’s contribution.  Contributing late in the year is far better than a 40% hit.

Conclusion
Having both a strong HSA balance and unreimbursed QME credits puts you in an advantaged financial position.  During a spell of unemployment, these provide cover for 1) insurance premiums and 2) random cash needs.  I make it one of my goals to pay all of my QME out of pocket so I can pull tax-free cash later.    This is an excellent safety net for an unexpected job loss.

In the worst case, you are prepared for difficult times.  In the best case, you have more in your HSA to compound and grow.  Get strategic with your HSA to better prepare for your future.